Q4 2019 Earnings Call

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The conference operator.

Welcome to some dialogue or worse fourth quarter, and your end 2019 conference call and webcast.

As a reminder, all parties pick up I mean listen only mode and the conference is being recorded.

Please be advised that this call will not have acuity session.

She didn't even as discussed during the conference call you may signal, an operator by pressing star and.

I'd now like to turn the conference over to Jayson Investor Relations and diodes <unk>. Please go ahead Mr. Mike.

Good morning, and welcome to send no growers fourth quarter and for your 2019 financial results Conference call.

This morning, we issued a press release announcing our financial results for the fourth quarter and full year ended December 31st 29 team.

This press releases are available on our website SMB all grew dot com and filed on Edgar and SEDAR.

Presenting on this morning's call, we have Zach George Chief Executive Officer.

And restore president and Chief operating Officer, and Jim keel, Chief Financial Officer.

Before we start I would like to remind investors that certain matters discussed in todays conference call could constitute forward looking statements actual results may differ materially from those anticipated risk factors that could affect results are detailed in the Companys financial reports and other public filings that are made available on Edgar and SEDAR.

Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated.

Now, let's turn the call over to its actually George.

Thank you, Jason and thank you everyone for joining us on our fourth quarter and for year 2019 earnings call.

I was appointed as Chief Executive Officer about eight weeks ago on January Thirtyth.

I accepted the role because of my interest in sundial unique assets and its data driven approach to park development.

These factors represent competitive advantages in a challenging emerging industry, one that is rapidly being rationalized and consolidated.

Well sundial has achieved several important milestones over the past year. The company is also faced a number of internal and external challenges, including operational difficulties excess leverage.

Poor cost controls regulatory delays and rapidly evolving industry conditions in order to be successful and delighting our core consumers. The sundial team is dedicated to improving our focus and discipline at every level the business.

I'm excited to work with the leadership team that has deep experience in consumer packaged goods and industrial agriculture.

During these early days in my tenure I haven't inspired by the sundial teams willingness to embrace change and work together in a decisive manner. During this unprecedented crisis related to cope with 19, our corporate and frontline staff have shown tremendous dedication encourage.

Many provinces of Dean canvas to be an essential service, which in an extremely challenging environment motivates us to continue to deliver high quality products to the game market.

We've made some significant changes in Q1 to position Sundar for success as we pursue profitable self sustaining operations in 2020, our primary corporate objectives are as follows.

To deliver industry, leading best in class products with a focus on inhalable.

To de risk, our balance sheet and improve liquidity.

The increase our capacity utilization to unlock the value of our high quality assets.

And to conduct a disciplined review of our portfolio of initiatives in Q1.

As I indicated de risking our balance sheet, an improving liquidity our key priorities. We're currently in active negotiations to secure and finalize the financing transaction.

As well we're in discussions with our lenders to restructure our credit agreements into global credit facilities. The goal is to provide additional working capital to facilitate our operational rap while also strengthening our overall capital position.

We will update investors as we have material information to release.

In spite of challenging Canada as market conditions as well as the pressures Tobin 19 is placing on the broader economy, reaching profitability in 2020 is a top corporate objective.

As we have disclosed previously we implemented measures to reduce costs into liner operating structure with our core value proposition.

Flexible production footprint in olds, Alberta allows us to exploit variable cost reductions during periods of market disruption.

Lastly, we are in undertaking an in depth portfolio review.

As part of this review, we are evaluating the economic viability of each asset opportunity and partnership and an objective and disciplined manner.

We are approximately halfway through this review.

It is clear that sundial success will require significant focus if we attempt to be all things to all people we are guaranteed to experience failure.

Well, we expect to update our investors on the material conclusions of our view along with Q1 results in May. We currently expect the he'll help in play strategy to be narrowed material.

[noise] sundial has numerous competitive advantages we have best in class facilities in Canada that produced high quality product.

Already established and growing brand presence and engage and talented employees that are also shareholders.

Today, we are discussing important steps forward in sandals evolution as a premium cannabis company.

During my first two months the CEO a team has successfully mitigated a number of significant business rats.

And we've acknowledged the need to change and are excited by the opportunity to continue to grow Sundays business.

I'd now like to turn the call over to Jim Keogh send out CFO.

For a financial update.

Thank you Jack and good morning, everyone.

I'd like to remind everyone that all financial figures are in Canadian dollars, unless otherwise stated in the comparative quarter is Q3 2019, unless I state otherwise.

In Q4, 2019, we reported consolidated net revenues of $21.6 million down from 33.5 million in Q3 2019.

Our cannabis sales to provincial boards increased over the prior quarter sequential decline in total revenues is attributed to lower unbranded sales to other license producers.

Consolidated adjusted EBITDA for the fourth quarter was a loss of $19.7 million compared to a loss of 7.9 million in Q3.

Impacting Q4, adjusted EBITDA, we're certain costs embedded in cost of sales as well as general and administrative expenses, which I will go into in more detail in a moment.

I want to highlight that we recently announced several efficiency improvements and cost cutting initiatives that are expected to result in annualized cost savings of approximately $10 million to $15 million for 2020.

Substantial portion of these initiatives have been implemented with cost reductions being realized beginning in the first quarter of 2020.

Our net loss for Q4 was $145.9 million, including an impairment charge of $100 million related to the bridge farm acquisition.

Turning to the cannabis segment in the fourth quarter, we harvested approximately 11000 kilograms of cannabis and sold nearly 4300 kilograms of kind of us.

In comparison to last quarter, we sold twice as much product to provincial boards as we mentioned on our Q3 2019 conference call. We expect our sales to other license producers to decrease as a percentage of our total sales throughout 2020, as we pivot to increase sales under sundial brands to provincial boards.

Average selling prices in the quarter were $6.01 per gram per branded flour and $3.07 for unbranded flower.

Pricing to the board's was consistent on a quarter over quarter basis.

Cannabis net revenues for the fourth quarter amounted to $14.7 million.

Sales to provincial boards, representing just under 40% of total sales.

This compares to last quarter, where we reported revenues of $28 million sales to the provincial boards of just over 10%.

Gross margin for Q4, 2019 was a negative half million dollars compared to positive 7.8 million in Q3.

Our gross margin for the fourth quarter was impacted by higher cost of sales, resulting from product replacement costs and a provision for inventory obsolescence. These costs amounted to just over $2 million in the quarter.

We incurred higher DNA expenses during the fourth quarter due to increases in employee compensation costs royalties on topline products and a provision for credit losses on trade receivables than a total amounted to just over $2 million and we're not incurred in the third quarter.

Overall, we reported in EBITDA loss of 17.9 million for our cannabis operations in the quarter.

Moving to the UK business, our ornamental flower segment for the fourth quarter of 2019 reported revenues of $6.8 million and an adjusted EBITDA loss of $1.8 million.

The fourth quarter was appeared a significant capital investment for Sunda as we completed the fourth and fifth pods, an old and the people in processing building was largely completed.

Total we deployed $19 million in capital towards completing our old facility during the quarter.

With that we have substantially completed construction of our Canadian cannabis operations.

Given current market conditions, we've decided to postpone the construction of the merit BC facility, which would largely be used to produce BC, we'd co product until market demand improves.

In the UK capital expenditures amounted to $28 million in the quarter with the large majority of these expenditures directed towards the construction of the clay Lake Phase two expansion, which is substantially complete.

Given the fact that we're in the process of reviewing our entire asset portfolio capital expenditures will be limited to essential expenditures going forward with our facilities being newly constructed maintenance Capex is limited estimated about $750000 per quarter to maintain current capacity.

Turning to our balance sheet.

As of December 31, we had cash and cash equivalents, including restricted cash of $61 million well total debt stood at $178 million net debt was 117 million at year end.

To provide a more recent snapshot of our liquidity position as it February 29, 2020, cash and cash equivalents, including restricted cash stood at $43 million.

At year end 2019, we were not in compliance with our interest coverage ratio covenant.

However, we have since obtained waivers for the December 31, 2019 covenant breach.

Under the terms of the waivers we've agreed that honor before April 15th 2020, we will enter into a definitive purchase agreement related to the sale of bridge farm and enter into a term sheet with our secured lenders that sets out of financing strategy for sundial.

Well you to adhere to these terms will constitute an immediate event of default. The term debt facility lenders have also agreed to the for 1.2 million of the 2.8 million interest payment due March 31, 2020 until April Twentyth 2020.

Additionally, we are in advance discussions with our lenders to restructure our syndicated credit agreement and our term debt facility into global credit facilities.

We remain committed to working with our lenders to improve our overall liquidity and capital positions.

To further improve our liquidity, we've engaged financial advisors and advanced negotiations with potential public and private capital providers, which could provide further sources of equity and or debt.

We will provide an update in due course should we completed financing transaction.

We're also pursuing other avenues to improve our liquidity position, which could include liquidating inventory entering into long term supply agreements with other license producers as well as monetizing additional assets.

As Zach indicated we are conducting an entire portfolio review and we'll look to optimize our asset base I would highlight that as part of this review, we recently sold in noncore property and cameras PC for $2.1 million in Q1 2020.

Overall, we believe the culmination of our efforts will improve our liquidity and capital positions to ensure we have a solid foundation to withstand the current challenging environment and position us for future profitable growth.

No I understood or send us President and Chief operating Officer will review some of the key milestones that Sundar has achieved to date.

Thanks you.

First I'd like to reiterate that sundial strategic focus will be consumer and customer centric within the Canadian recreational industry.

Our portfolio of high quality candidates products has been developed with the focus on the Inhalable segment.

Listing flower beat in concentrates.

We have invested in developing best in class differentiated facilities in Canada, leveraging our award winning genetics and an experienced teams some dollars to deliver on our value proposition.

We're currently selling under four brings grasslands palmetto sundown topics expand the entire value chain.

The illustrates how we are building our brands capturing market share in Canada, I want to share some commercial highlights.

We successfully launched our based products on the first day of legalization December with strong initial sales and customer demand.

In fact, 100% of the baby inventory from our first production run in December so done in a few weeks.

Following the recent Alberta gaming liquor and cannabis approval printing candidates deep sales in Alberta.

Entire beep cartridge inventory.

18200 cartridges sold on the first and sales.

At the beat market develops we expect to see further gross.

We have also achieved strong sales statistics in the last few months with.

Top leave ranking amongst the highest pricing tiers across Canadian retail.

In Ontario.

I'm doubt candidates lemon right is a top selling be SK you.

The fourth highest selling 510 cartridge while top piece Strawberry cream is the second best selling Veight asking you within the best pricing category.

Susan and customer demand remains strong for our portfolio products.

And our launched a total of 105 Sq news in the I don't use market in the first quarter 2020 to date, representing a 72% increase versus the fourth quarter 2019.

New launches represent 74 flower SK use and 31 day baskets under the top lease sunbelt cannabis.

Metal and grasslands brands.

I know also plans to launch additional products in 2020 in Canada under its existing brand portfolio based on market conditions customer feedback and data analytics.

Our sales two points of distribution remains healthy and we'll continue to invest intelligently inner brands nationally.

Although our focus is on branded sales.

We recently executed a significant wholesale agreement with a top five license producer represented estimated net revenue of 9.3 million.

We realized in the first half 2020.

We continue to ramp up operations in the fourth quarter and now have all 114 glow rooms at our olds ever facility completed and fully licensed.

We are using our purpose built modular grow rooms to cultivate over 20 strains.

Which are being sold under all of that Brad to potential boards.

The majority of our harvests are now testing about 18% THC several harvest now testing well above 20%.

Each strain has its own optimal growing environments and while we continue to treat each specific environments. We believe the high quality product. We are harvesting validates the cultivation success of our old facility and our production techniques.

We have listed and shipped adult use cannabis products the nine Canadian provinces from coast to coast.

February 2020, some now received approval from Quebec, expanding our distribution networks to cover 98% to the national recreational industry.

While we still has some heavy lifting due to get to where we need to be I believe we have made significant progress in very short period of time, given we only started selling or sundial branded product in January 2019.

With that.

I'd like to turn the call back to back for closing remarks.

Thanks, Andrew to conclude I look forward to engaging with you and many of sunbelt stakeholders over the coming weeks and months.

We're working hard to ensure that sundial navigate the current challenging an uncertain environment has adequate liquidity and become sustainably profitable.

The next 12 to 24 months, we believe that our industry will see many business failures as well as sums consolidation against this backdrop sundial will leverage the strength of our team assets and brands as we seek a strong leadership position within the industry.

Thank you everyone for joining the call and we look forward to updating you on our progress when we report our Q1 2020 financial results.

Take care of yourselves and stay safe I will now turn it back over to the operator.

Thank you Sir This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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